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Macro Musings: The Dogs of War

Politics / Russia Sep 09, 2007 - 11:07 PM GMT

By: Justice_Litle

Politics Invisible transfers and long distance calls Hollow laughter in marble halls Steps have been taken, a silent uproar Has unleashed the dogs of war... -- Pink Floyd, Dogs of War


What rough beast, its hour come round at last
Slouches towards Bethlehem to be born?
-- Yeats, The Second Coming

THE TATTERED VELVET GLOVE wears thin at the knuckles; the iron fist now clearly shows through. On June 1 st , Russian President Vladimir Putin was quietly interviewed by a group of G-8 journalists at his country home outside Moscow. Putin sent a clear message: Russia will not be hemmed in by the world's policeman. He spoke in the relaxed, confident tones of a Don Corleone, merely expressing his wish that America be reasonable. Of course no one wants violence , the tone seemed to whisper. We are all civilized here. But if America continues to threaten our interests, what can we do?

Putin's main complaint was in regard to a new anti-missile defense system (to be based in Germany). The plan was dreamt up with Iran in mind, but Russia sees it as a threat -- and has retaliated with an ante-raising threat of its own. From the interview:

Q: Are we returning to the time when Russian nuclear missiles were targeted on Europe?

A: Of course we are returning to those times. It's obvious that if part of the strategic nuclear potential of the U.S. is located in Europe... we will take the corresponding steps in response. Of course we will have to get new targets in Europe. Which weapons will be used to destroy those targets that in the opinion of our military specialists pose a threat to the Russian Federation -- ballistic missiles, cruise missile or it could be completely new systems -- that's a technical matter...

Simply a "technical matter," you see. Some phone calls, some arrangements... shrug. No one wants violence. No one wants blood. I find these matters as distasteful as you. But, when push comes to shove....

The most exquisite part of the interview was yet to come. In true mafioso form, Putin bristled at the notion that he was anything less than an upstanding citizen of the global community. His self-righteous detractors, in fact, had no right even comparing themselves to him.

Q: Do you consider yourself a "dyed-in-the-wool democrat," as Gerhardt Schroeder once called you?

A: Of course I am. I am an absolutely pure democrat. The real tragedy is that I am the only one. Elsewhere in the world there just aren't any others. Let's look at what is happening in North America -- nothing but horror. Torture, homeless people, Guantanamo and the detention of people without trial. Let's look at what is happening in Europe. Look at how they deal with demonstrators. The use of tear gas in one capital or another, the murder of demonstrators in the street. Then look at the post-Soviet space. Ukraine, all our hopes were on the guys in Ukraine, but now they are drifting towards tyranny and a complete breach of the constitution.

Since Mahatma Gandhi died, there's just no one left to talk to.

Since Mahatma Gandhi died? Mahatma Gandhi ?! Has the man gone crazy? Could Putin really view himself as a suffering saint, on the same level as Mahatma Gandhi, even as he speaks of pointing missiles at Europe?

Of course not. The Gandhi quip is calculated satire, pure and simple. If one has ears to hear, the hidden words come through. I say outrageous things so you are forced to dig deeper, to digest my real message. You in the West are weak, and have long held Russia in contempt. Well guess what; Russia is now strong, and so we hold contempt for you.

The game has entered a new stage. Thanks to its vast stores of oil & gas -- and the roughly $400 billion in currency reserves amassed so far -- Russia no longer sees the need for false civility. Putin is casually but firmly expressing his dissatisfaction with the current order of things; he no longer accepts the implied status quo of subordination to the United States. (Or Europe for that matter.)

Elsewhere, actions speak louder than words. At a conference debate earlier this year, legendary oil man T. Boone Pickens predicted that British Petroleum (BP) would come to regret making big bets in Russia. His words now appear prophetic. The Wall Street Journal reports:

Russian regulators could move [soon] to revoke a production permit from a $20 billion [British Petroleum] natural-gas project in Siberia, in a test case of just how far the Kremlin will go in its drive for control over the energy sector.

..."At this point, BP not losing everything would be seen as a positive surprise," said Rory MacFarquhar, an analyst at Goldman Sachs in Moscow.

Fortunately, Russia's belligerence is born of strength. Putin is dangerous but not cornered. As the man calling the shots, he is less likely to let a missile fly.

Iran's belligerence, in contrast, may be born of desperation -- and is thus far more worrisome. Reuters reports:

Iran 's president said on Sunday the Lebanese and the Palestinians had pressed a "countdown button" to bring an end to Israel.

President Mahmoud Ahmadinejad, who triggered outrage in the West two years ago when he said Israel should be "wiped off the map", has often referred to the destruction of the Jewish state but says Iran is not a threat.

"With God's help, the countdown button for the destruction of the Zionist regime has been pushed by the hands of the children of Lebanon and Palestine," Ahmadinejad said in a speech.

"By God's will, we will witness the destruction of this regime in the near future," he said. He did not elaborate.

Recall that, just recently, President Ahmadinejad pulled a populist rate-cut stunt that his advisors deemed "economic suicide." Also note that Iran is gripped by an inflation rate of 20% (perhaps higher), a general unemployment rate as high as 30% (according to Iranian dissidents), and youth unemployment as high as 50%. As if this weren't enough of a molotov cocktail, Iran's main revenue source is in strategic peril. Long before the oil and gas wells run dry, production could drop to the point where cash flow from exports is threatened. This could happen within a space of years.

As a result of the "suicide" rate cuts, and a monetary base that was already expanding at a breakneck 40% pace, Iran's next stop could be hyperinflation. They say desperate times require desperate measures; for Ahmadinejad, it's looking like desperate times indeed. Provoking a military confrontation with the United States or Israel, no matter how risky, might well be the preferable option for Iran's leaders -- in comparison to death-by-slow-boil on the domestic front. Hence the escalation of harsh words and irrational actions as things worsen at home.

Where is America in all this? Caught up in the morass of Iraq, a land where dragging defeated leaders through the streets is a matter of tradition; caught up in the war on terror, clamping down on border security and unraveling plots to blow up JFK; caught up in a war of words with China, where currency manipulation is blamed for out of control deficit spending.

It is a given that wars are expensive, draining, and distracting -- and that weakness attracts other predators. This is why conflict tends to beget more conflict, like hyenas surrounding a wounded wildebeest. But maybe the hyena analogy is too concrete -- after all, the lines are usually quite blurred. Where do motives of self-defense end and motives of hostile aggression begin? Does Russia have a moral case for rejecting American anti-missile defenses in Europe? If not, does the United States have a right to bristle at China's prowess in shooting down satellites? Who can say for certain when righteousness is in the eye of the beholder?

We would say that war is probably coming, but that isn't exactly accurate; war is already here. Better to say, then, that more war is coming.

But war of what kind? After all, there are hot wars and cold wars; world wars, civil wars, guerilla wars and trade wars; wars of attrition, wars of ideology, wars of words.

The most recent addition to the lexicon, perhaps, is cyberwar.

The concept of cyberwar, waged entirely by way of the internet, has been around a good while. The subject was first broached ten years ago, in James Davidson & William Rees-Mogg's Sovereign Individual , and was probably explored before that.

Yet the recent attack on Estonia is probably the first "cyberwar" instance of real geopolitical substance. The New York Times reports:

A cyber attack on the Baltic country of Estonia will likely shape a debate inside many governments over how such attacks should be considered in the context of international law and what sort of response is appropriate.

The Estonian government compares the episode, which it has blamed on Russia, to an act of war. The Kremlin has denied any Russian government involvement.

Since the end of April, the unprecedented cyber attack has crippled Web sites operated by Estonian government ministries, banks, media outlets and other companies. The "denial of service" attacks swamp Web sites with so many hits they are forced to shut down.

The attack comes as the U.S. and other governments are mulling how to respond to cyber attacks. "There is a discussion over how cyber aggression should fit into current law and whether a conventional attack would be suitable retaliation," said Johannes Ullrich, chief technology officer at the SANS Institute, a Bethesda, Md., Internet-security company that tracks threats to the Internet.

When it comes to technological adaptation, Estonia is a country well ahead of the times. The Estonian government is far more reliant on "digital pipelines" than its neighbors -- a mark of modernity and efficiency. But, thanks to Russian hackers, it is also now seen as a mark of vulnerability.

This development is in perfect keeping with the promise and threat of technology. The more advanced a society becomes, the more vulnerable it becomes to a single point of disruption. Consider the island of Manhattan; fitting millions of people in such a small space is an amazing testament to logistics. And yet, the temporary loss of just one or two supply lines would throw the city into total chaos.

Ever greater reliance on technology -- the "digital pipeline" so to speak -- is all but guaranteed, regardless of the many risks. The relentless drive for productivity has created a sort of arms race; companies, and increasingly governments, must go digital if they hope to stay competitive.

An excellent observation from Davidson and Mogg (again in their 1997 book, The Sovereign Individual ) is that technology is ultimately decentralizing; the democratization of technology favors small-scale disruptive activity. A single individual with a shoulder-mounted rocket launcher can attack a military convoy or sever an oil & gas pipeline with ease; the same lone individual can use a computer to attack a digital pipeline at its weakest point. What's more, because location is irrelevant in cyberspace, an attack can be launched from anywhere.

When one considers the critical nature of the targets, the ubiquitous nature of the threats, and the world's growing reliance on digital pipelines, it seems clear that defensive technology -- i.e. digital security -- is poised for long term growth.

To clarify, when someone mentions the DoD -- America's Department of Defense -- it is actually offense , not defense, that springs to mind. Helicopters. Tanks. Fighter jets. Submarines. Means of taking the fight to the enemy, not vice versa. Though the Amex Defense Index ($DFI) is soaring these days, this isn't the type of defense we are talking about. Military technology is consistently under threat of being deprecated, escalated, or deprived of funds. That new line of tanks, say, could suddenly become obsolete. Tanks could be deemed useless under threat of a nuclear shoot ‘em up. An overstretched government might decide to shift funding elsewhere.

Digital security needs, on the other hand, apply to public and private sectors alike -- in times of war and times of peace. Peace of mind is paramount; for serious customers with critical data to protect, cost is a minimal factor (or no factor at all). Digital security providers are often employed as sentinels, giving them a locked-in stream of repeat business. Their subscription-based or consulting-based revenue models allow for continuous, real-time product upgrades, avoiding the headaches of new version launches. And thanks to growth in the developing world, the potential customer base is expanding rapidly.

The handful of noted players in this space -- companies like Checkpoint (CHKP:nasd), McAfee(MFE:nyse), and Symantec (SYMC:nyse) -- had stagnated until recently, due to the street's general view that growth opportunities were stagnating. But the high profile nature of Estonia's troubles (which began back in April) appear to have changed that perception. The whole digital security industry smells ripe for takeover... smaller fish are being acquired by bigger fish, and the bigger fish themselves are bait for cash-rich private equity firms.

Profitably Yours,

Justice_Litle
http://www.consilientinvestor.com

Copyright © 2007, Angel Publishing LLC and Justice Litle

Justice Litle is the editor and founder of Consilient Investor. Consilient Investor is a broad ranging collection of articles ( written by yours truly) on markets, trading and investing... and big ideas related to such. It is also home to the Consilient Circle, a unique trading and investing service.

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